India is becoming increasingly relevant. Not only does it have the world’s fastest-growing large economy, but it will soon be the world’s most populous nation.
Therefore, does it not make sense to look at India as a standalone allocation, as global investors increasingly do with China?
There is no doubt that as an investment opportunity, India has proved a tough nut to crack. In the past, foreign access to domestic markets was notoriously difficult, while persistent volatility and lack of transparency discouraged many investors.
Some investors may be concerned that considering India as a separate asset class is slightly premature. Afterall, the only other emerging market economy to really enjoy such status is China, which is expected to drive 33% of global growth in 2019, and overtake the US as the largest global economy by 2030, according to MF, Visual Capitalist, 15 March 2019.
MSCI is in the process of increasing the weighting of China A-shares in its global indices, with China currently making up 33% of the MSCI EM index. As this weighting becomes larger, India's weighting will become proportionally smaller.
Historically, some of this underrepresentation in regional benchmarks was justified, as international investors were constrained by foreign ownership restrictions in certain sectors and low free floats of shares. However, this is constantly changing, and benchmark providers have been slow to react.
India has been lifting foreign investor limits across sectors substantially and, in the latest budget, the government indicated that it would be selling down its stakes in certain companies to below 51%, increasing the free float.
Furthermore, out of 5,500 Indian quoted companies, only 79 make it into the MSCI India index which focuses on larger, big name stocks at the expense of the rich array of small and mid-cap companies, which is where India's growth story truly lies.
Over the past ten years, Indian mid-cap stocks have compounded at an impressive 13% per annum in US dollar terms - almost double that of the MSCI World index over the same period. And these returns are being realised in periods of both high and low oil prices, good and bad governments, ‘risk off' and ‘risk on'.
To access India's full potential, UK investors must look beyond the benchmark and consider supplementing their existing regional equity allocations with a standalone fund that has the flexibility to include small and mid-cap names.
India as an economy presents some impressive statistics: is now the seventh largest economy in the world with a nominal GDP of $2.5trn and the International Monetary Fund is expecting growth in India to rise from 7% in 2019 to 7.2% in 2020.
From a consumer perspective, the country's demographics offer compelling reasons for investing. 50% of the population are under the age of 25, in stark contrast to the Western world which is suffering from an ageing population and declining workforce.
As the working population increases, so too do household incomes; the sales reach is vast and Indian companies are reacting to rapidly evolving spending habits of this demographic.
India's catch-up potential is unique and exciting, which raises the question: why would an investor want to own India in a catch-all fund which only dilutes its value?
As another indication of this impressive growth, India's per capita data usage is now three times higher than that of China, according to Companies Filings on mobile network operators Reliance Jio and China Mobile, as well as being the fastest-growing market for mobile phones globally.
Almost half of India's internet users are between 15 and 24-years-old and are connected online for up to 10 hours a day. Since average incomes are growing fast from a low base, this generation will usher in the new wave of e-tail consumption.
The enabling power of the internet is creating new domestic consumer bases in India - boosting both local economic growth and the revenues of ‘connected' companies.
Wealth managers in particular would do well to consider India as a standalone investment. Rising costs, pressure on fees and heightened regulation has caused a flurry of deal activity within the UK wealth management market, resulting in increased consolidation and a landscape dominated by fewer, larger firms.
These big name wealth managers are historically inclined to encourage their investment managers to own funds on their ‘buy lists', meaning the end clients also end up owning the same few funds. More than ever before, wealth managers must differentiate themselves and identify interesting investment opportunities.
However, the depth of the Indian equity market means that neither a limited weighting in an index nor a passive regional mandate will fully capture the country's growth potential.
While some risks are inevitable when investing in a developing economy, India's adherence to the rule of law, independence of the central bank and free media de-risks an investor's exposure relative to other emerging markets.